Two central tenets of contemporary management, value-based management (VBM) and corporate social responsibility (CSR) are right in theory but flawed in practice.

The central idea of VBM is that shareholder value is conceived as the primordial concern of the enterprise, and that this value is the time-adjusted ‘present value’ of all future cash flows. The central idea of CSR is that business also has responsibilities ‘beyond the bottom line,’ and must conduct its affairs in an ethically and socially responsible manner. Proponents of CSR go further, claiming that long-term business goals can only be achieved if managers act responsibly, and not to do so may backfire on the business itself.

Used together, VBM and CSR should, therefore, drive not only long-term sustainable growth and profit, but also social progress, not regress. Alas, practice does not measure up to theory.

The "Shareholder Value" Trap

In practice, followers of VBM often fall into the ‘shareholder value trap,’ treating shareholder value as a direct goal rather than a desirable result, and ‘pushing’ on it rather than pulling it through by working on the drivers underlying it. Or, under the pretence of pursuing shareholder value, robbing Peter to pay Paul (often themselves) handsome bonuses, creating perceived inequities and discord among those who should put their shoulders to the value creation wheel.

A further hiccup is the very real difficulty of assessing uncertain future cash flows and setting the appropriate discount rate. Small wonder then that executives as well as financial markets put more weight on measurable short-term results than pie-in-the-sky long-term projections. As if this were not enough, VBM’s long-term intent fights an uphill struggle against an increasingly short-term world. Private equity, short executive tenure, and, as in Russia, a generalised pattern of making hay while the sun shines, are just a few examples of the strong forces for results—NOW!

The Failure of CSR

CSR falls short in practice because it is still often a staff, not line, responsibility. As such there is over-emphasis on PR and the sponsorship of good deeds and an under-emphasis on issues integral to the business itself. There is also too much of a focus on compliance sign-offs on shiny codes of conduct and too little focus in the line itself on the other ‘4 Cs,’ namely controls, censure, communications, and exemplary leadership conduct.

Executive incentives are also heavily oriented to business performance and pay scant attention to the presence or absence of responsible behaviour. It is, therefore, expedient for executives to keep their heads down when difficult choices are on the table. And it is a heroic assumption that companies can mostly ‘do well by doing good.’

Too often, exercising social responsibility comes at the expense of the business. Analogous to VBM, CSR fights its own uphill struggle in a globalizing world where business corner cutting, consumers shooting themselves and society in the foot (sub-prime mortgages), and inadequate government rules and regulations, are commonplace.

Digging in: Fighting for Reality

A fundamental problem is that too few leaders have dug their heels firmly in the ground against the steady drift to the short term, to corner cutting and to lip service rather than real concern for society’s interests. As a consequence, both VBM and CSR fall short.

Manifestly some things can and should be altered:

Putting CSR in the line, where it belongs,

Using all the ‘6 Cs’ by leadership vigilantly exercising its governance role,

Incentivising business performance only when it is achieved responsibly, and

Articulating long-term customer needs rather than pandering to short-term wants.

These are but a few. But real progress will be made only when business leadership itself changes its spots, and lives up to the growing challenges and broadening responsibilities with which it is now confronted. VBM and CSR can then be put to work as they were intended.

Business schools have an important role to play in these much needed changes as well: first, to teach their students a healthy respect for translating classroom theories about VBM and CSR into executive practice; and second, in their research, by putting more practice into theories of responsibility.

But their most important contribution will be to preach as well as teach—to inspire present and would-be leaders to step up to the new mark.

Derek F. Abell is Professor Emeritus and Founding President of the European School of Management and Technology, Berlin, Germany, and Professor Emeritus of the Eidgenössische Technische Hochschule Zürich, Switzerland. He was previously Professor at IMD, Lausanne, Switzerland, and Dean of that Institution in its earlier development from 1981-89. Prior to that he was Professor at the Harvard Business School, Boston, USA.